Working Paper（15-002E） 「Choice of market in the monetary economy」

We investigate a monetary model `a la Lagos and Wright (2005), in which there are two kinds of decentralized markets, and each agent stochastically
chooses which one to participate in by expending effort. In one market, the
pricing mechanism is competitive, whereas in the other market, the terms
of trade are determined by Nash bargaining. It is shown that the optimal
monetary policy may deviate from the Friedman rule. As the nominal interest
rate deviates from zero, buyers expend more effort because a higher interest
rate increases the gain for buyers from entering the competitive market, while
the marginal increase in social welfare by entering the competitive market is
also positive.